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1、,Source:HSBC,Company report,FIGInsuranceEquity KoreaKorean Reinsurance Co(3690 KS)N(V):Still early to bargain hunt,abcGlobal Research,Neutral(V)Target price(KRW)Share price(KRW)Potential return(%),12,00010,50014.3,With rising insured loss estimate for Hurricane Sandy,earnings visibility is likely to
2、 remain low until the year-end,on top of much-delayed earnings recovery,Note:Potential return equals the percentagedifference between the current share price andthe target priceMar 2012 a 2013 e 2014 eHSBC EPS 444 1,252 1,960HSBC PE 23.6 8.4 5.4,We further cut FY12e-13e earnings by 18%and 6%to refle
3、ctweak investment yield,margin compression from tighter riskmanagement and higher P&C/overseas losses,PerformanceAbsolute(%)Relative(%),1M-7.5-9.1,3M-2.8-3.1,12M-30.9-36.2,Maintain Neutral(V)with unchanged target price ofKRW12,000 despite valuation year roll-forward to FY13,Note:(V)=volatile(please
4、see disclosure appendix)Low visibility on the potential loss from Hurricane Sandy weigh on shares,on top ofmuch slower-than-expected earnings recovery:We expect the earnings visibility atKorean Re to remain low until the year-end with added concerns about the potential loss,28 November 2012Sinyoung
5、Park*AnalystThe Hongkong and Shanghai BankingCorporation Limited,Seoul SecuritiesBranch+822 3706 James Garner*Head of Asian Insurance ResearchThe Hongkong and Shanghai BankingCorporation Limited+852 2822.hkView HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities(USA)Inc,a
6、nd is notregistered/qualified pursuant to FINRAregulationsIssuer of The Hongkong andreport:Shanghai BankingCorporation Limited,Seoul Securities BranchDisclaimer&DisclosuresThis report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,whi
7、ch forms part of it,from Hurricane Sandy.Korean Res exposure to the North America region stood at 2.1%ofFY11 total premium and the basic structure for Hurricane Sandy event includes USD5mndeductible and USD30mn XOL limit.The company believes that the losses will not exceedthe USD5mn deductible as 1)
8、underlying coverage is mainly residential and 2)no businessinterruption cover is provided in US due to internal underwriting guidelines.However,westill believe a near-term share price recovery will be difficult.Post the multiple Thai floodloss revisions,many investors still do not take comfort in co
9、mpany guidance unless provenotherwise,and the overall insured loss estimate is rising AIR Worldwide raised HurricaneSandy insured loss estimate to a range of USD16-22bn on 27 Nov 2012 vs.previous 2 Novestimate of USD7-15bn(See page 3 for details).The pace of earnings recovery continues to be slow:We
10、 continue to believe solid andpersistent earnings recovery is necessary for a share price recovery post the multiple Thai floodloss revisions,but in reality,1H12 result stands at only 26%run rate vs.KRW200bn companytarget due to 1)squeezed margin from tighter risk management(i.e.,higher XOL cost ofK
11、RW18bn incremental in Apr12),2)weak investment yield owing to postponing therealization of bond valuation gain and falling market rates,3)worse-than-expected loss ratiotrends due to an increased number of accidents,including recent typhoons and 4)unearnedpremium burden from accelerated growth.Valuat
12、ion&risks:We maintain our N(V)rating and unchanged target price of KRW12,000.Estimate downgrades are offset by the rolling of our valuation forward to 2013.We continue tovalue the stock on a PB using the Gordon Growth Model to arrive at a price target multiple of0.82x PB,net of 35%discount due to we
13、ak disclosure(15%),poor investor confidence due tomultiple Thai flood loss estimate revisions(10%)and the fear of new entrants(10%).Index KOSPI INDEX Free float(%)73Index level 1,925 Market cap(USDm)1,142RIC 003690.KS Market cap(KRWb)1,240Bloomberg 003690 KSSource:HSBC,Korean Reinsurance Co(3690 KS)
14、Insurance28 November 2012Financials&valuationP&L summary(KRWbn),Group valuation metrics,abcKorean Re,Year toGross premium writtenNet earned premiumsTotal claimsOperating expensesIncrease of cat reserve(a)Underwriting profit(after cat reserves)Net investment incomeOperating incomePre-tax profitNet in
15、come(b),Mar-125,1813,397(2,988)(641)-(231)162777444,Mar-13e5,9153,811(3,147)(709)-(44)194190183138,Mar-14e6,7334,312(3,393)(848)-72222294286216,Mar-15e7,3994,773(3,751)(946)-77247323316239,Year toP/EV Group-Group ROEVP/Tangible NAV-RoTNAVP/BVPS-ROEP/Adj.BVPS-ROAdj.BVP/EDividend yield,Mar-120.9x6.5%0
16、.9x3.6%0.9x4.4%0.9x3.6%23.6x0.6%,Mar-13e0.8x10.8%0.8x10.3%0.8x10.3%0.8x10.3%8.4x2.4%,Mar-14e0.7x10.9%0.7x14.2%0.7x14.2%0.7x14.2%5.4x3.7%,Mar-15e0.6x9.3%0.6x13.9%0.6x13.9%0.6x13.9%4.9x4.1%,Adjusted net income(b)-(a)*(1-t),44,138,216,239,Per share data(KRW),Operational metrics,Year to,Mar-12e,Mar-13e,
17、Mar-14e,Mar-15e,Year toLoss ratioLoss ratio(FX adjusted)Expense ratioCombined ratioCombined ratio(FX adjusted)Investment yield(FX adjusted),Mar-1284.0%88.0%18.9%102.9%106.8%5.1%,Mar-13e81.4%82.6%18.6%99.9%101.2%5.2%,Mar-14e78.7%78.7%19.7%98.3%98.3%5.2%,Mar-15e78.6%78.6%19.8%98.4%98.4%5.3%,EV group-g
18、rowthTNAV-growthBook value-growthAdjusted book value-growth,11,383-4.2%11,383-4.2%11,38349.1%11,383-4.2%,12,86313.0%12,86313.0%12,86313.0%12,86313.0%,14,65513.9%14,65513.9%14,65513.9%14,65513.9%,16,44812.2%16,44812.2%16,44812.2%16,44812.2%,Adjusted EPS,444,1,252,1,960,2,161,Gross premium,-growthEPS,
19、-72.6%444,181.9%1,252,56.5%1,960,10.3%2,161,Year toRetail(Life,LT,Motor)Corporate P&COverseas,Mar-122,0862,0461,049,Mar-13e2,3032,2201,392,Mar-14e2,5312,4571,744,Mar-15e2,7052,6592,036,-growthDPSIssuer Information,-59.2%60,181.9%250,56.5%392,10.3%432,Total GPWGrowthRetail(Life,LT,Motor)Corporate P&C
20、OverseasGPW growth,5,18113.8%8.8%26.9%14.1%,5,91510.4%8.5%32.8%14.2%,6,7339.9%10.7%25.3%13.8%,7,3996.9%8.2%16.7%9.9%,Share price(KRW)Target price(KRW)Market cap(USDm)Market cap(KRWbn)Free float,10,50012,0001,1421,24073%,Price relative,16431154311443113431124311143110431943184317431,16431154311443113
21、431124311143110431943184317431,2010Korean Reinsurance Co,2011Rel to KOSPI INDEX,2012,2013,Source:HSBCNote:price at close of 26 Nov 20122,Korean Reinsurance Co(3690 KS)Insurance28 November 2012Earnings visibility likelyto remain low With rising insured loss estimates for Hurricane Sandy,we expectearn
22、ings visibility to remain low until the year-end,on top of much-delayed earnings recovery We further cut FY12-13 earnings estimates by 18%and 6%toreflect delayed earnings recovery and potential loss fromHurricane Sandy(KRW5.5bn deductible)Maintain Neutral(V)with unchanged target price of KRW12,000de
23、spite valuation year roll-forward to FY13,abc,Earnings visibility furtherpressured by Hurricane SandyWith rising insured loss estimate for the HurricaneSandy(AIR Worldwide raised Hurricane Sandyinsured loss estimate to a range of USD16-22bnon 27 Nov 2012 vs.previous Nov 2 estimate of,USD7-15bn,and E
24、qecat,RMS and Swiss Reestimate USD20-25bn),we expect earningsvisibility to remain low until the year-end withadded concerns on the potential loss from theHurricane Sandy,on top of much delayedearnings recovery.,Exhibit 1:10 costliest hurricanes ordered by insured losses and the latest loss estimate
25、related to the Hurricane Sandy,(USD bn)160125120,Overall loss,Insured losses,8040,62,38,19,27,17,23,14,22,13,16 12,18,8,7,6,12,6,10,5,52,20-25,0,HurricaneKatrina,HurricaneIke,HurricaneAndrew,HurricaneIvan,HurricaneWilma,HurricaneRita,HurricaneCharley,HurricaneIrene,HurricaneFrances,HurricaneHugo,Hur
26、ricaneSandy,(*estimate)Source:Munich Re,Significant natural catastrophes 1980-2011 10 costliest hurricanes ordered by insured losses3,40,20,(20),(40),0,Korean Reinsurance Co(3690 KS)Insurance28 November 2012*Korean Res exposure to the North Americaregion stood at 2.1%of FY11 total premium andthe bas
27、ic structure for Hurricane Sandy eventincludes USD 5mn deductible and USD 30mnXOL(excess of loss)limit.Hurricane Sandy losses for Korean Re may not,We continue to believe solid and persistentearnings recovery is necessary for a share pricerecovery post the multiple Thai flood lossrevisions,but in re
28、ality,1H12 result stands at only26%run rate vs.KRW200bn company target.Exhibit 3:Slow earnings recovery at Korean Re,abc,be severe but still need confirmation withrising overall loss estimateWhile the company believes that the losses will,(KRW bn),Slow earnings recovery,greatly exceed USD5mn deducti
29、ble amount as 1)underlying coverage is mainly residential and 2)no business interruption cover is provided in USdue to underwriting guidelines,we still believe anear-term share price recovery will be difficult asmost investors still do not take comfort unlessproven otherwise post the multiple Thai f
30、lood lossestimate revisions.Exhibit 2:Overseas premium composition at Korean ReFY05 FY06 FY07 FY08 FY09 FY10 FY11,Thai flood lossesApr10 Oct10 Apr11 Oct11 Apr11 Oct11 Apr12Monthly net earningsSource:Company dataEarnings changesWe further cut FY12 and FY13 earnings estimates,Asia MarketFar EastMiddle
31、 EastSoutheastEuropeAfricaAmericaNorth AmericaLatin America,73%42%22%9%16%2%9%4%5%,75%44%24%6%18%1%6%3%3%,79%51%24%5%14%1%6%3%2%,73%45%23%5%17%3%8%5%3%,72%46%20%6%17%2%9%6%3%,67%41%21%6%18%2%13%10%3%,70%46%18%5%14%3%14%11%4%,by 18%and 6%each to reflect delayed earningsrecovery and potentially higher
32、 losses from itsexposure to the hurricane Sandy.We have alsolowered our investment yield assumption by10bps in FY12 and 20bps in FY13,respectively,to reflect falling market rates.In addition,losses,Source:Company dataMuch delayed earnings recoveryThe pace of earnings recovery continues to beslow due
33、 to:Squeezed margin from tighter riskmanagement(i.e.,higher XOL cost ofKRW18bn incremental in Apr12)Weak investment yield owing to postponingthe realization of bond valuation gain andfalling market rates Worse-than-expected loss ratio trends due toan increased number of accidents,includingrecent typ
34、hoons Unearned premium burden fromaccelerated growth4,in its domestic P&C line has been rising due toincreasing accidents and led to 26%pt y-o-yincrease in its loss ratio in 1H12.With primaryinsurers seeing carried-over claims from typhoons,we expect to see continued deterioration in itscash-cow dom
35、estic business.Despite significant downward earnings revision,the book value only showed marginal movementsmainly due to a sharp increase in the unrealizedgain of AFS(available-for-sale)securities underthe accumulated other comprehensive income,which is a shareholders equity item and liftedSeptember
36、 2012 shareholders equity by 3%.,89%,6%,Korean Reinsurance Co(3690 KS)Insurance28 November 2012Exhibit 4:Change in estimates,Under our research model,the Neutral rating band,abc,KRWRatingPrice targetCOEMarch 2013e EPSMarch 2014e EPSMarch 2015e EPSMarch 2013e BVPSMarch 2014e BVPSMarch 2015e BVPS,OldN
37、(V)12,00011%1,5182,0852,31512,83814,74316,765,NewN(V)12,00011%1,2521,9602,16112,87214,66416,457,RevisionNo change0%0%-18%-6%-7%0%-1%-2%,for volatile Korean equities is 10ppt above andbelow the local hurdle rate of 10.5%,or a 0.5-20.5%above the current share price.Our target priceimplies a potential
38、return of 14.3%,within theNeutral band of our model;therefore,wedowngrade to Neutral(V)rating.Potential returnequals the percentage difference between the,Source:HSBC estimatesValuation and risksWe maintain our Neutral(V)rating on Korean Rewith unchanged price target of KRW12,000although we have rol
39、led forward our base,current share price and the target price,includingthe forecast dividend yield when indicated.Exhibit 6.:Our rating and target price are below consensusBloombergBuyHold,valuation year to FY13.We derive a KRW12,000 target price which isbased on PB methodology using the Gordon,Sell
40、Average price targetHSBCeAbove/(below)consensus,6%17,08812,000-30%,Growth Model to arrive at a price target multiple of0.82x PB,net of 35%discount due to weakdisclosure(15%),poor investor confidence due tomultiple Thai flood loss estimate revisions(10%)and the fear of new entrants(10%vs.5%previously
41、 as larger primary insurers are looking toenter overseas reinsurance market which mayincrease the competition level for captive volume).Our multiple is predicated on a company specificcost of equity(11%)and 1%long-rungrowth assumption.Exhibit 5:Valuation methodology,Source:HSBC estimates,BloombergRi
42、sksDownside risks include:(1)additional lossesfrom the Thai flood,(2)emergence of a secondreinsurance company in Korea with a significantcapital position;(3)a significant increase inprimary insurers retention rate;and(4)largeexposure to a potential natural disaster.Upside risks include:(1)stronger-t
43、han-expectedmarket rates leading to better investmentperformance,(2)prolonged hardening of thereinsurance market,lifting Korean Res,MethodologyP/Adj.BVAdd:FY 2012e dividendValuation discountPrice target,Weight100%,Value19,51539235%12,000,Potentialreturn14%,profitability,(3)faster-than-expectedstreng
44、thening of the risk-based capital(RBC)model in Korea to boost domestic volume growth.,Implied P/BV,0.8x,Source:HSBC estimates(Potential return equals the difference between the current shareprice and the target price,including the forecast dividend yield when indicated)5,Mar-07,Jul-07,Nov-07,Mar-08,
45、Jul-08,Nov-08,Mar-09,Jul-09,Nov-09,Mar-10,Jul-10,Nov-10,Mar-11,Jul-11,Nov-11,Mar-12,Jul-12,Mar-07,Jul-07,Nov-07,Mar-08,Jul-08,Nov-08,Mar-09,Jul-09,Nov-09,Mar-10,Jul-10,Nov-10,Mar-11,Jul-11,Nov-11,Mar-12,Jul-12,Korean Reinsurance Co(3690 KS)Insurance28 November 2012Exhibit 7:Korean Re shares trade at
46、 0.82x FY12 PBR25,00020,00015,00010,0005,0000,Exhibit 8:Korean Re shares trade at 8.4x FY12 PER25,00020,00015,00010,0005,0000,abc,Price,0.7x,1.0X,1.3X,1.6X,Price,6.0 x,8.0X,10.0X,12.0X,6,Source:Thomson Reuters Datastream,HSBC estimates,Source:Thomson Reuters Datastream,HSBC estimates,Korean Reinsura
47、nce Co(3690 KS)Insurance,abc,28 November 2012Disclosure appendixAnalyst CertificationThe following analyst(s),economist(s),and/or strategist(s)who is(are)primarily responsible for this report,certifies(y)that theopinion(s)on the subject security(ies)or issuer(s)and/or any other views or forecasts ex
48、pressed herein accurately reflect theirpersonal view(s)and that no part of their compensation was,is or will be directly or indirectly related to the specificrecommendation(s)or views contained in this research report:Sinyoung Park and James GarnerImportant disclosuresStock ratings and basis for fin
49、ancial analysisHSBC believes that investors utilise various disciplines and investment horizons when making investment decisions,whichdepend largely on individual circumstances such as the investors existing holdings,risk tolerance and other considerations.Given these differences,HSBC has two princi
50、pal aims in its equity research:1)to identify long-term investment opportunitiesbased on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;and 2)from time to time to identify short-term investment opportunities that are derived from
